Linkages between office markets in Europe: a volatility spillover perspective
Abstract
Purpose
Using a data set comprising 16 European office markets provided by the DTZ Research Institute from Q1 2003 to Q4 2013, the purpose of this paper is to measure the strength of the unconditional transmission of volatility in the returns to direct property between 16 European office markets with the objective of determining the degree of unconditional spillover between markets.
Design/methodology/approach
To examine volatility spillovers across the 16 office markets, the authors adopted the generalized VAR methodology, variance decomposition and the generalized spillover index of Diebold and Yilmaz (2012) by measuring cross-office market volatility transmission in asset pricing through estimates of several “volatility spillover indices.”
Findings
Volatility spillovers are important and time-varying across the leading office markets, with cross-market volatility interaction being bi-directional and of relative endogenous nature for many markets. The London office market is the “volatility leader” and has exerted significant net volatility influence on the other markets. Additionally, the volatility spillovers between business cycle fluctuations and asset market cycle volatilities are linked across some European economies.
Research limitations/implications
Evidence of co-integration among the domestic volatility spillover cycles implies the presence of unobserved common shocks and might not be good news for international investors who pursue diversification strategies in European office real estate markets.
Originality/value
No previous study has addressed formally the measurement and assessment of the nature and intensity of volatility spillovers across direct office markets on such a broad range of European office markets. The relevance of the topic has been even increasing over the previous years as more and more investors seek for flexibility and participation in the investment process and asset management.
Keywords
Acknowledgements
Data for this research are provided by the DTZ Research Institute. No other form of funding is involved. An earlier version of this paper has received the DTZ Research Institute Award for Academic Innovation 2014.
Citation
Liow, K.H. and Schindler, F. (2017), "Linkages between office markets in Europe: a volatility spillover perspective", Journal of Property Investment & Finance, Vol. 35 No. 1, pp. 3-25. https://doi.org/10.1108/JPIF-02-2016-0010
Publisher
:Emerald Publishing Limited
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